By: Emma Cutler, Senior Analyst, Verdantix
News of climate change and El Nino-induced drought slowing traffic in the Panama Canal hit home headlines last week. Where the news will likely never appear, however, is in companies’ own reporting, even for companies that suffer significant losses, at least not as climate-related losses. Although the World Meteorological Organization cites this economic damage from droughts With an increase of more than 60% compared to the 20-year average, companies today are blind to the risks posed by climate change and do not take into account the climate impacts behind them. For many, it’s simply because they don’t understand it.
Companies face a growing number of climate risks that are more urgent and serious than previously thought, from extreme weather events disrupting supply chains to increasing climate litigation and regulations against carbon-intensive industries. Despite growing business concerns about climate change, companies lack access to the information and skills needed to understand and act on climate risk.
Companies underestimate climate risks
The consequences of climate change are already being felt across the global economy. Storms, heat waves, wildfires, floods and droughts disrupt supply chains, impact labor and resource availability, damage infrastructure and increase operating costs. These acute hazards, combined with chronic changes such as sea level rise, make some assets in high-risk locations uninsurable. Research of Morningstar Sustainalytics found that with 2°C warming, the average ratio of losses from physical climate risk to operating cash flow for some industries could be close to 4%.
Despite these material financial risks, Verdantix research found that 40% of enterprise risk managers expect minimal or no risks to physical operations from climate change by 2030. The reasons for this disconnect stem, at least in part, from a lack of information and skills. Climate expertise is concentrated in academic environments rather than in industry, and existing climate research, models and scenarios do not sufficiently identify the risks for companies. In a summer 2023 survey of business leaders, Verdantix found that a lack of data availability is a significant barrier to climate risk analysis and management for 36% of respondents, while around a quarter struggle to integrate insights into decision-making processes .
Many companies do not disclose the financial consequences of climate change
Less than 30% of companies disclose climate impacts on revenues, expenditures, assets, liabilities, capital and financing. In the same way the Verdantix Climate Benchmark shows that at twelve of the world’s largest software companies, disclosures on the impact of climate-related risks and opportunities address an average of only 40% of TCFD recommendations. In the insurance sector, the average climate impact disclosure meets only 30% of TCFD recommendations.
However, some companies do not have the luxury of ignoring credible climate risks, and tellingly, these risks are evolving at a much faster pace, making it increasingly difficult to understand, prepare for and invest in these risks. Industries directly exposed to climate change – such as utilities, energy and materials – are more likely to disclose financial impacts. Insurers and large banks, whose liability is diversified and social, are more likely to be subject to regulation and may face even stricter requirements in the future.
Underestimating climate risks creates new threats to business
Failure to disclose climate impacts exposes companies to lawsuits. Even in the absence of climate-specific regulations, companies that fail to disclose the material impacts of climate change face securities trading charges. fraud. These lawsuits have direct financial consequences and can damage reputation, creating a cascade of climate risks.
Mispricing poses an additional threat to underestimating risks. If the financial consequences of climate change are not taken into account, assets could become overvalued price bubbles. As climate impacts progress and extreme events become more frequent and intense, overpriced assets will be devalued, with potentially devastating financial consequences for public and private sector actors.
New approaches are needed for assessing companies’ climate risk
Translating academic knowledge, data and climate scenarios to support sector-relevant research is crucial. The IPCC emphasizes an optimistic future in which warming is limited to 1.5°C. However, companies also need information on the economic consequences and worst-case adaptation options, including a 4°C scenario, which the French government has included in his own analysis. To improve access to and ability to use relevant climate data, companies should build their internal climate skills while working with climate change advisors, advisory services and digital solutions. Understanding the financial impacts of climate change is critical to corporate climate risk management and the future of business health.